Abstract
This paper reconsiders the efficiency of the market using the results from a Wall Street Journal contest of the ability of professional investment analysts to outperform the market with their monthly publicly announced stock selections. The monthly returns seem to indicate that the experts outperformed the market by a statistically significant margin, after adjusting for risk. However, analysis of the daily returns demonstrates that virtually all of this abnormal return arises in the first two trading days following the public announcement of their selections. More importantly, virtually all of this initial abnormal return is gradually retracted by the market over the succeeding 39 trading days.
The anomalous announcement day return has systematically increased over the duration of the contest. This is inconsistent with a market that, if not efficient from the outset, at least aspires to attain efficient behavior over time by reducing anomalous behavior from a systematically repeated event. Finally, the anomalous announcement day abnormal returns for experts who “won” the contest in the preceding month were twice that of the other contestants, despite evidence that placement in the monthly contest is determined by chance.
These results indicate a market inefficiency under which the market can be temporarily overly influenced by the announced opinion of an “expert.” Hence, the results are consistent with recent conjectures that overreaction to information may explain a growing body of literature documenting mean reversion in stock prices. Moreover, these findings suggest that an “expert” who publicly announces a pick that, by chance, produces an abnormal positive return would thereafter be in an enhanced position to influence the market by ever-increasing margins with subsequent recommendations.
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